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The business news continues to be full of stories of large companies getting into trouble in part because of their complexity.  The big banks, from JP Morgan to Citibank, BNP Paribas and UBS, are all facing unprecedented levels of fines because, essentially, they were out of control – the good intentions and directives from those at the top didn’t actually keep mid-level and frontline people from making bad decisions. And plenty of other companies, from Siemens to IBM to Sony, are struggling to adapt, at least in part through bureaucratic overload and burdensome decision-making processes.

It is easy to label big companies as overly complex. But what does this mean in practice? What does complexity feel like to a front-line employee or a customer?  Here is a personal anecdote that makes complexity a bit more real.

A few months back, my small consultancy business received a payment of £3,000 for some consulting work I had done for one of the top 20 companies in the UK, let’s call it Megafirm. I did the work twenty months earlier – it took then more than a year and a half for them to pay me.

I guess I should have been angry or frustrated at the delay, but in fact the longer it went on the more I became intrigued by what was happening (or, in fact, not happening). At no point in this 20 month period was there any dispute about whether my small business (my wife and I) was owed the money. Everyone we spoke to in the company was polite, helpful and increasingly apologetic. And yet somehow they couldn’t pay us.  Some sort of glitch in the payments system meant that the initial invoice wasn’t paid on schedule, at which point the problem disappeared into a big black hole.

As the delay in payment entered its second year, I started to ruminate on what had gone wrong, and I realised that this tiny problem was a microcosm of this bigger problem of complexity.

Who, I asked myself, owned the problem? If I had been trying to get paid by a small company, the answer would have been obvious: I would have talked to the boss, he would have pulled out his chequebook, end of story.

But trying to get paid by a global company with 80,000 employees, it rapidly became clear to me that no-one owned the problem.  In theory there were three plausible owners. One was my immediate client, the guy I did the work for. He was on my side, and indeed suitably embarrassed by the whole thing, but powerless and just not that interested – after all, he has his own job to do, and chasing invoices was a waste of his time.

Then there was the person who ran the payables department, or whatever that internal function was called in Megafirm. But to this day, I still don’t know who that person might have been, if indeed he or she existed in the first place. We spoke to people in processing centres in London, Mumbai and Warsaw, but how they were connected to each other, if at all, never became clear to us.

Then there was the person at the top – the Chief Financial Officer in this case, to whom we eventually wrote a letter, just at the point when the money finally arrived. But while he was ultimately accountable, he was also completely removed from the action. I don’t think he understood the payables process in his company much better than we did. The only value in seeking his involvement was as a vague threat to the people in Mumbai and Warsaw.

So who really owned this problem? It gradually became apparent that we did. My wife invested several days sending emails and calling people in India and Poland. Megafirm had outsourced the problem to us.

The Two Faces of Complexity

Think about this point at a broader level, and the implications are scary.  When companies become too complex to manage, they create costs to others.  Of course, it is well known that they make life miserable for their employees –Karl Marx first observed this more than a century ago.  But equally importantly, they also impose a burden on the companies who have to deal with them. Suppliers like my little business get stuck trying to figure out how to get paid. Customers despair at the lack of joined-up thinking between the various divisions. Regulators and government officials often struggle to know who to talk to. And when companies lose control of their employees, as the banks did in the mid 2000s, it is the good old taxpayers who end up footing the bill.

The complexity of our large companies is a curse. But we have to remember that complexity is also a good thing. Companies are complex by design because it allows them to do difficult things. IBM has a multi-dimensional matrix structure so that it can provide coordinated services to its clients. Airbus has a complex process for managing the thousands of suppliers who contribute to the manufacturing of the A380.  In short, complexity is a double-edged sword. As with cholesterol, there are good and bad variants, and it is never easy separating out the complexity we value from the complexity we need to cut back.

So what is a leader to do when faced with a highly complex organisation and a nagging concern that the creeping costs of complexity are starting to outweigh the benefits?

Much of the advice out there is about simplifying things – delayering, decentralising, streamlining product lines, creating stronger processes for ensuring alignment, and so on.  But this advice has a couple of problems. One is that simplification often ends up reducing the costs and benefits of complexity, so it has to be done judiciously. But perhaps the bigger problem is this advice is all offered with the mentality of an architect or engineer. It assumes that Jamie Dimon was the architect of JP Morgan’s complexity, and that he, by the same token, can undo that complexity, presumably through some sort of reengineering or restructuring process.

Unfortunately, organisational complexity is, in fact, more complex than that. To some extent, organisations are indeed engineered systems –we have boxes and arrows, and accountabilities and KPIs. But organisations are also social systems where people act and interact in somewhat unpredictable ways. If you try to manage complexity with an engineer’s mindset, you aren’t going to get it quite right.

How Complexity Comes about

I have been puzzling over complexity in organisations for a while now, both through personal experiences like not getting my invoices paid and also through higher-level conversations with executives in large companies. I have come to the view that there are three processes underway in organisations that collectively determine the level of actual complexity as experienced by people in the organisation.

1. There is a design process –the allocation of roles and responsibilities through some sort of top-down master plan. We all know how this works.

2. There is an emergent process – a bottom-up form of spontaneous interaction between well-intentioned individuals, also known as self-organising. This has become very popular in the field of management, in large part because it draws on insights from the world of nature, such as the seemingly-spontaneous order that is exhibited by migrating geese and ant colonies. Under the right conditions, it seems, individual employees will come together to create effective coordinated action. The role of the leader is therefore to foster “emergent” order among employees without falling into the trap of over-engineering it.

3. Finally, there is an entropic process – the gradual trending of an organisational system towards disorder. This is where it gets a bit tricky. The disciples of self-organising often note that companies are “open systems” that exchange resources with the outside world, and this external source of energy is what helps to renew and refresh them. But the reality is that most companies are only semi-open. In fact, many large companies I know are actually pretty closed to outside influences. And if this is the case, the second law of thermodynamics comes into effect, namely that a closed system will gradually move towards a state of maximum disorder (i.e. entropy).

This may sound like gobbledegook to some people, so let me restate the point in simple language: as organisations grow larger, they become insular and complacent. People focus more on avoiding mistakes and securing their own positions than worrying about what customers care about. Inefficiencies and duplications creep in. Employees become detached and disengaged. The organisation becomes aimless and inert. This is what I mean by entropy.

The trouble is, all three processes are underway at the same time. While top executives are struggling to impose structure through their top-down designs, and while well-intentioned junior people are trying to create emergent order through their own initiatives, there are also invisible but powerful forces pushing the other way. The result is that everyone is running very fast just to stand still. Go into any large company, and you will see a host of internal initiatives designed to make things work better. In theory, once these initiatives have done their job, things would be fixed. In practice, there is also something else that needs fixing.

The Executive’s Job in Managing Complexity

So what can we do differently? How should our leaders approach the challenge of managing their large complex organisations? Sometimes, a sharply-focused and “designed” change works well, for example, pushing accountability into the hands of certain individuals who are much closer to the customer, or outsourcing a back-office function to a provider who can do it better.

But more and more the leader’s job is to manage the social forces in the organisation. And in the light of the analysis here, it should be clear that this effort can take two very different forms.

One is keeping entropy at bay. This is the equivalent of tidying your teenager’s room. It involves periodically taking out layers of management, getting rid of old bureaucratic processes that are no longer fit for purpose, or replacing the old IT system. It is thankless work, and doesn’t appear to add any value, but it is necessary.

The other is inspiring emergent action. This is the equivalent of giving a bunch of bored teenagers a bat and ball to play with. It is about providing employees with a clear and compelling reason to work together to achieve some sort of worthwhile objective. It isn’t easy to do, but when it works out the rewards are enormous. Here is a quick example: a friend of mine called Jesper Ek heads Roche’s Diabetes Care business in Sweden. When he took over, it was losing money and morale was low. Rather than analyse the product/market segments served, or restructure the division, or change the incentive system, he invested his time in getting to know the people. He got them to develop a new vision for the division, which became “everyone with Diabetes is living their life as unrestricted as possible.”  This vision then inspired a series of bottom-up initiatives, emergent action that led to a rapid and successful turnaround in the fortunes of the division.

There is a third role for the leader, one that sits on top of the other two: it is to keep the company open and transparent. Recall the point I made earlier, that the more open a system is to external sources of energy, the easier it is to harness the forces of emergence rather than entropy.  What this means in practice is that leaders have to continually look for ways of bringing new perspectives into their company, and exposing internally-focused procedures to external scrutiny.

My experiences with Megafirm are a case in point. Their accounts payable process lacked any sort of accountability to the people it ultimately affected, i.e. suppliers like me who need paying. The principle of greater openness suggests an obvious fix: provide all suppliers with the name and email address of the person who is responsible for payables, so that when the process goes awry (which probably isn’t that often) we know who to talk to.

There are plenty of other ways of increasing openness as well: refreshing a management team with outside hires, transferring employees across divisional boundaries, making people explicitly accountable to external stakeholders, collaborating with suppliers and partners, and conducting experiments in “open innovation”.  These are valuable things to do in their own right, but in addition they have the broader positive benefit that they help to keep the forces of entropy at bay.

The bottom line here is that managing complexity is a real art. It has to be tackled in a thoughtful and holistic way. Leaders need to think about both faces of complexity – the costs and the benefits. And they need to develop an understanding of the social dynamics through which it emerges.

Skrevet av Julian Birkinshaw ved London Business School

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